|Over the past 13 weeks, shares of Pioneer Natural Resources (PXD) have substantially outperformed the Standard & Poor's 500, and the recent wide-range blast higher by the stock makes possible a low-risk, high-probability short-term put sale that has a lot going for it. Let's take a look at PXD's weekly graph first and see what the general lay of the land looks like before attempting to pick the most suitable June-expiry option to sell. See Figure 1.|
|FIGURE 1: PXD, WEEKLY. With a strong trend, high relative strength and a fresh breakout/buy signal and strong support levels, the current state of PXD's weekly chart is well-suited to a short-term put sale, one that's far out-of-the-money.|
|Graphic provided by: MetaStock.|
|Graphic provided by: WB Detrend RT EOD from ProfitTrader for MetaStock.|
|With the broad market embarking on a brief countertrend bear market rally, it might pay to look for trade setups that offer a decent low-risk, near-term profit potential while also being somewhat protected from a sudden reversal lower. Running a relative strength screen for fresh Rahul Mohindar (RMO) swing buy signals on a diverse group of large-cap stocks yielded this gem of a chart setup that you now see for PXD. For someone who wants to put on a covered call or to sell a put, it doesn't get much better than this one, and here's why:|
* PXD is far outperforming the S&P 500 by a factor of better than 155% over the past calendar quarter (13 weeks). Big money obviously likes this stock, and that's the kind of stock you want to be long.
* The stock is enmeshed in a long-term bullish trend, with its series of higher highs and higher lows still intact.
* The spread between the 23- and 50-period exponential moving averages (EMAs) is still increasing, confirming its upward momentum.
* The new RMO daily swing buy signal also coincides with a daily breakout of an upper pattern resistance line, and if the stock rises much more, it will also complete a bullish weekly breakout.
* Finally, the detrend oscillator (bottom of chart) is nicely configured should PXD decide to keep on trucking higher, as it is nowhere near its most recent high.
Note the location of the 23-week EMA (red line on chart) near $55.42 and the prior weekly bar's low at $55.77; this area surrounding $55.50 is offering enterprising option sellers a very solid support barrier, one well-suited to the job of protecting a short-term June $55 put sale.
|FIGURE 2: PXD GREEKS. Designed by geeks for option trading freaks — like you and me. Seriously, this is a very attractive short put sale setup from almost any trading angle.|
|Graphic provided by: Thinkorswim.|
|With only 15 days until June expiry, traders choosing to sell a June 2010 PXD $55 put for $0.45 to $0.50 or better have a lot of option trading dynamics aligned in their favor:|
* Delta is pitifully low at only (-0.10) on this far out-of-the-money (OTM) put.
* Theta is generous at (-0.05) per day; you earn $5 daily simply waiting for expiration.
* Vega is a mere (-0.02), meaning little implied volatility risk.
* Gamma is the rate of change of delta, and is negligible on such a far OTM option.
See Figure 2.
|Running this trade is a piece of cake; once filled, you place a mental stop (not a hard stop -- you need to let option prices breathe a bit so you don't get unnecessarily stopped out so often) so that if the short put doubles in value, you'll buy it back for a modest loss. You'll also want to watch that support barrier near $55.50 -- if you see the market suddenly reverse lower, you may want to use that as your line in the sand to get you out of a put sale gone haywire (hey, it happens sometimes). If PXD cooperates and continues to surge higher, you can also make good use of the 50-day EMA on the daily chart (not shown) as a lovely, no-hassle trailing stop, one designed to safely shepherd this little put play into the profit zone without much risk of early stopout. That EMA is currently near $61.68, and if you see a wide-range, high-volume daily close on the south side of that EMA, you might consider that as an early warning to close the trade out early, hopefully for a modest profit. |
Other than that, unless the broad market decides to turn sharply lower again within the week, you might find this to be a very attractive, low-stress put sale. The broad markets have likely put in that anticipated weekly cycle low (in the context of a bear market rather than a bull market, so don't expect to see another February to April kind of rally again anytime soon). There appears to be some more room for higher prices, especially in the strongest stocks and sectors.
|Title:||Writer, market consultant|
|Company:||Linear Trading Systems LLC|
|Jacksonville, FL 32217|
|Phone # for sales:||904-239-9564|
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